11 September 2009

Economist All Wet On CA Judicial System Costs

Sometimes people who can be perfectly sane and rational about some concepts can lose all sense of proportion and reality in others. A post at Econbrower by James Hamilton, a professor of economics at the University of California, San Diego, about an 63% increase in judicial branch expenditures in California's general fund budget, which implies that class action lawsuits are at fault, is such a case.

He asks:

In the Governor's proposed 2009-2010 budget, $3.4 billion dollars, or 2.5% of the total, is allocated to state trial court funding. That's a 63% increase over the $2.1 billion that was spent in 2001-2002. Which led me to wonder: when, and in what manner, did California voters express a desire for a big increase in consumption of judicial services provided by the state over the last decade?

Then, he provides a blockquote from a class action settlement notice that he received recently and goes on to state:

I receive something like this on a pretty regular basis these days-- someone has sued, allegedly on my behalf, a company for something that I in fact do not acknowledge to be a serious transgression against me personally. The award is significant dollars for the lawyers who file the case, and some trinket offered to me.

I'm sure some of our lawyer readers can offer spirited arguments for why this growth in the role of the courts has been most helpful and beneficial. But here's what I really wish they'd tell me. If California voters desired a decrease rather than increase in the consumption of judicial services provided by the state, exactly how, under our current system of governance, could we achieve it?

Of course, it is never that simple. As the budget document he cites explains the vast majority of the judicial branch budget in Califonia goes towards funding trial courts, an expense that is also partially paid for by county government and filing fees.

But, a 1997 law adopted in California "capped the counties' general purpose revenue contributions to trial court costs at a revised 1994-95 level." And, a 2002 law in California transferred "responsibility for court facilities . . . from the counties to the state by July 1, 2007."

In other word, the state general fund budget tells you almost nothing about California's consumption of judicial services. Funding has simply been transferred from one level of state and local government to another. It could have gone up overall, but it also could have gone down. The state's consumption of judicial services at the trial court level doesn't appear in the state budget, only the amount of funds transferred from the state government to California's counties to provide judicial services does. Trial court judges in California are local employees, not state employees.

Class action lawsuits filed in California's superior courts, as opposed to federal court (where federal law has mandated that most national class action lawsuits be filed since 2005) are a tiny part of the docket. As someone else making a comment on the blog post noted:

The statistics show that of all California superior court cases, only 2% are unlimited civil cases (greater than $25,000). The vast majority, 85%, are criminal felony and misdemeanor cases.

If you just look at all civil cases, only 12% are unlimited civil. The rest are motor vehicle injury, marital law, family law, probate and small claims.

Now of the unlimited civil cases, only 27% are torts. The other 73% are contract disputes, companies suing each other. More interesting are the trends. Torts are down 30% in the last 8 years while contract disputes are up 17%.

The vast majority of tort cases (about 0.5% of the cases handled by judges in the state), of course, are not class action lawsuits. The number of class action lawsuits filed each year in California is not large. From 2000-2005 combined there were probably fewer than 5,000 class action lawsuits filed in the state (based upon a survey of 75% of all civil lawsuiits seeking $25,000 or more of damages in the state), an annual average of about 900 per year, statewide.

It isn't that class action lawsuits aren't more common in California. In Los Angeles the number filed went from 500 to 800 in the past few years. But, the base number is so small it doesn't make much of a difference. About half of cases which settle are either employment (often wage and hour claims) or breach of contract cases.

The reality of judicial system costs is that the costs on the judicial system itself are heavily backloaded. Judicial involvement in the month or two before trial is often significant, and a trial of a class action lawsuit would typically take the full time efforts of a trial judge, a law clerk, a court reporter, about eight jurors (including alternates) and the part time services of court officials who provide security and supervise the jurors.

But, class action lawsuits almost never go to trial. The California judicial department study cited above notes that only 9 out of 1,294 class action cases in its study that were closed in a six year period were resolved with a trial, about 0.7% of the total. There are a couple of class action trials a year in California.

By comparison, in the time frame during which there was 9 class action trials, there were 7,235 trials in non-class action civil trials in California in unlimited damage civil actions, including 1,064 jury trials. Non-class action cases were twelve times as likely to go to trial as class action cases were to go to trial. There is one class action trial per 100 civil jury trials in unlimited damages civil cases in California, and there was one class action trial per 700+ civil trials of any kind in such cases. While class action case trials are longer than an average civil trial, they aren't that long, and the vast majority of trials in California (like every U.S. state) are in criminal cases.

The vast majority of cases are settled (31%), dismissed in motion practice (33%), transferred to another court (12%), or merged or coordinated with another case (20%). Notably, "The percentage of settlement dispositions skyrockets to 89.2% if the analysis is confined to cases with a certified class (258 out of 289 total certified cases with a disposition) with 88.4% of these certified as part of the settlement itself (n=228)." The average class action case is closed in sixteen months.

About 95% of California class action cases were either certified as a class in connection with a settlement or not certified as a class at all. Only 5% of these cases (62 over a six year period) were certified as class actions involuntarily by a court. The public gets notice only of cases that were meritorious enough to settle and have a settlement approved by a judge.

Dismissals, transfers, coordinations and consolidations happen on average five to seven months after a class action case is filed. The nine of cases that did go to trial were resolved in an average of two and half years in what is widely acknowledged as one of the most complex kinds of cases to take to trial.

Typically, a low level court official with computer assistance makes sure that the papers in the case are filed properly and alerts a judge only when action is required. An initial scheduling conference in a civil case, even a class action, can often be completed with less than a hour of judicial time. The balance of the time devoted to a class action case that is fairly protracted will involve rulings on a class certification motion, one or two dispositive motions, a couple of discovery motions, and a settlement motion accompanied by a brief hearing. Much of the time consuming legal research is often done by a law clerk with the benefit of the full briefing from the parties to the case. Many motions, once fully briefed and reviewed by a law clerk, while they take time, don't take all that much time. The vast majority of the costs in a class action case fall on the parties to the case (often hundreds of thousands of dollars in litigation costs per party alone).

The filing fees assessing in a class action case ($350 to file a class action lawsuit, and $350 per defendant to respond to one), go a long way towards covering the costs that these cases impose on California's judicial system.

In short, the evidence is absolutely overwhelming that class action cases have virtually nothing to do with the increasing California state budget line item for trial courts. The predominant factor is a transfer of funding from the local to the state level, and an increase in the burden posed by the criminal docket probably explains all or most of the rest.

These kinds of rants undermine the credibility of academic economists, whose stock in trade is being able to sort out important from unimportant economic impacts at a quantitative level. Alas, the shallow analysis in the post, that jumps to a foregone conclusion before really understanding the problem or the factors involved, is all too common in academic economics. It is a pre-disposition of the discipline.